News Corp Could Go the Way of Enron If the Contagion Isn't Contained

By Preston, Alex | New Statesman (1996), July 18, 2011 | Go to article overview

News Corp Could Go the Way of Enron If the Contagion Isn't Contained


Preston, Alex, New Statesman (1996)


News Corporation's key investors are--for the moment--standing behind Rupert Murdoch. Kingdom Holding Company, the largest external shareholder, is owned by the Saudi prince Alwaleed Bin Talal, who has come out strongly in support of Murdoch, saying: "The crisis does not make Kingdom Holding blink at all. It makes our partnership stronger." The investment guru Donald Yacktman, whose company has a 3.2 per cent stake in News Corp, also backed Murdoch. According to one of the portfolio managers at the Yacktman Funds, the hacking scandal will be "a short-term reputational hit".

Other investors are less sanguine. A group of US shareholders led by Amalgamated Bank is suing the firm for its handling of the crisis. The complaint, filed in a Delaware court, alleges: "It is inconceivable that Murdoch and his fellow board merhbers would not have been aware of the illicit news-gathering practices [at the News of the World]." The shareholders criticise the culture of nepotism at News Corp, saying: "Murdoch has treated News Corp like a family candy jar, which he raids whenever his appetite strikes."

Domino effect

News Corp's share price has consistently traded with a so-called Murdoch discount--a recognition, perhaps, that shareholders in the firth do not have many of the powers that they would have if they owned the stock of a rival firm. Murdoch engineered News Corp's equity to ensure that much of the publicly traded shares are "non-voting", meaning that even if investors disagree with his decisions, many are virtually powerless to challenge them.

Any company formed in the image of its CEO will suffer unless it has a very clear succession plan. James Murdoch's fumbling attempts to manage the crisis in the UK will only heighten the market's suspicion that the heir apparent is a lightweight. His father's dictatorial style has discouraged activist investors from backing News Corp, which is one of the reasons for the shares' poor performance, compared to both the S&P 500 and its US peers: Disney, Time Warner and Viacom.

News Corp shares fell steeply on n July as the company referred its bid to take over BSkyB to the Competition Commission, buying time to push through the purchase of the 61 per cent of BSkyB it doesn't already own. More worrying for Murdoch was the spreading of the privacy-violation scandal to other News International titles. Rumours are now circulating that Murdoch is considering disposing of the entire News International business. News Corp shares sank by 13 per cent between 5 and n July, with daily trading volumes up to ten times the historical average.

What is at stake here is the issue of corporate governance. A comparison with Enron may seem alarmist. Enron was cooking its books to overstate its profitability; News Corp is "merely" suffering reputational damage in one regional outpost of its global media empire. Given the steep decline in News Corp's share price, however, and the sense of panic coming from analysts, investors and the wider media, Murdoch will have to act quickly to stave off an Enron-style crisis. …

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